Asia's Odd Couple Make for an Explosive Mix

 | Mar 20, 2017 | 12:00 PM EDT
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Could things get messier on the Korean peninsula? And should investors be worried?

The South Korean president has become the first leader in the country's era of democracy to get kicked out of office. The bribery scandal that claimed her scalp has also implicated Samsung, the South's flag bearer and source of 15% of its entire economy.

And on the North Korean side, "Supreme Leader" Kim Jong-un keeps asserting his power and masculinity by shooting missiles over the Sea of Japan. Oh, and they're not-so-coincidentally sent in the direction of the country's former colonizer.

This is Asia, after all. So things almost certainly can, and very likely will, get messier.

I'm not sure it's time for investors to head to the bomb shelter just yet. But I'm getting considerably more worried about the situation, having completely ignored North Korea's teenage tantrums in the past. That's all the more true after Secretary of State Rex Tillerson's first Asian tour in office, on which he suggested the United States might even fight a "hot war" with the North.

in South Korea, the bribery charges threaten to rope in the chaebols that run the country, as I explained earlier this month when the heir to the Samsung throne went on trial. South Korea's corporate culture is essentially on trial. While on the positive side, business and government may finally be rent asunder, there's sure to be some temporary dislocation, particularly if executives start to go to jail.

There has been no impact in the markets so far. The benchmark Kospi index drifted 0.35% south on Monday, a day after North Korea said it had conducted a ground test of a fancy new high-thrust missile engine -- one which, if successful, would bring it a step closer to launching an intercontinental ballistic missile. South Korean stocks are up 6.31% so far this year, their best run in two years.

That's despite increasing belligerence from the North, China's attempts to distance itself from the totalitarian regime that almost it alone supports, and kickback from the South's main ally, the United States.

The two Koreas are Asia's odd couple: inseparable, yet always at odds. You can virtually hear Laurel and Hardy chirping at each other in the background: "Well, here's another nice mess you've gotten me into." 

I guess Kim is Hardy, not Laurel, given his build. He bears an uncanny resemblance to his grandfather, "Great Leader" Kim Il-sung, the father of modern North Korea. That, and his ruthless purge of opponents, including family members, has cemented his place atop the pedestals that were built in that nation as part of his leadership cult.

Will Kim meet his match in Trump? It will be an interesting standoff. And it's definitely a joker in the pack that investors should factor in when figuring out the strength of their hand.

Tillerson's Asian trip achieved exactly the end result that the Trump administration appears unable of doing at home -- it didn't end in farce.

He became the first senior member of the new administration to visit China and meet with President Xi Jinping -- a get-together that passed relatively smoothly although there were no tangible gains to show, according to Reuters. It was a positive first step at forging a successful working relationship after Trump continuously trash-talked China on the campaign trail.

Tillerson also visited Japan, although that visit was less pressing. Donald Trump appears to have already forged a fast friendship with Prime Minister Shinzo Abe. With Xi and Indian Prime Minister Narendra Modi all extremely popular with their home bases, these are the key leaders Trump must win over if he's to make any progress in Asia. 

Then there's Kim. For Tillerson's trip, the most significant among his statements is that the United States feels it has had enough of Kim's antics. While Kim is keen to flex his military muscles, to enhance his status as his country's strongman, Trump, Tillerson and the rest of the crew want to appear equally hard-headed.

Two decades of dealing with the North via diplomacy, sanctions and a carrot-and-stick approach over its nuclear program have failed, Tillerson believes.

"Let me be very clear: the policy of strategic patience has ended," Tillerson told reporters in Seoul, according to the Financial Times. "We are exploring a new range of security and diplomatic measures. All options are on the table."

That means a pre-emptive military "solution" to the North Korean problem is a potential outcome. Quite why the United States would want to attack the fourth-largest army in the world without direct provocation is beyond me.

It's true, however, that North Korea is getting closer and closer to posing a direct threat to the United States. Tillerson called it an "imminent threat" that has pushed the issue to the top of his agenda. But a threat and a real attack are very different things. 

The meeting with Xi led the Chinese leader, who will meet with Trump at the start of next month, to say that the two nations "are both expecting a new era of constructive development."

It also yielded an agreement that China and the United States would cooperate to counter North Korea's rapidly developing nuclear and ballistic missile programs. And for good reason.

In August, North Korea said it tested a submarine-launched ballistic missile successfully, after failing several times, then last month launched an intermediate-range ballistic missile that could carry a nuclear bomb. There were 24 ballistic-missile launches from the North last year alone, doubling the amount since Kim took power in 2011.

China has sought to persuade the United States to cease joint military training exercises with the South in return for a pledge from Pyonyang to halt further nuclear and ballistic-missile tests. That would allow China to win on both fronts, putting both South and North Korea in their place. And it's a highly unlikely outcome.

Tillerson showed no sign of backing away from Washington's long-time support of the South. The missile shield that China so opposes, and which has led to a boycott of Lotte products on the mainland, is still moving ahead.

We'll have to watch how the Trump administration positions itself on Asia next. Tillerson didn't take any press with him on his trip, bar one reporter from a little-known right-wing publication, so there wasn't a lot of coverage of how he operated -- something the ex-Exxon Mobil (XOM) chief said he wanted. 

But, having spent his life rising to the top of corporate culture, his first effort at high-stakes diplomacy was at worst a draw, at best a slight win.

With plenty to worry about in both Koreas, at least this visit to Asia didn't bomb.

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